What is the long-term impact of RFS cut?

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FARGO — The rumors are true. The Environmental Protection Agency has formally announced its plan to reduce minimum biofuel volumes for 2014, which roughly match the levels in a leaked October memo. The stated reason is that the EPA doesn’t believe the nation’s infrastructure and fleet can deliver or utilize the original mandated levels.

The EPA’s plan essentially reduces the floor for domestic corn-ethanol use from 14.4 billion gallons to 13 billion gallons. However, because of high margins, caused in part by relatively low-cost corn, domestic production of ethanol next year is expected to exceed the minimum and be somewhere around this year’s level of 13.8 billion gallons.

While more than the proposed minimum, that’s still 600 million gallons less than the original mandated level. It also means that about 215 million bushels of corn have lost their home. If there is some good news in this for agriculture, it’s that this bearish news already appears to have been priced into the market.

Hitting the blend wall

However, the bigger implications of the EPA’s plan are long term. If the blend wall limits mandated use, the impact of the Renewable Fuel Standard may be altered significantly.

After falling during the 2007 to 2009 recession, the number of vehicle miles traveled has plateaued. If this continues and fuel efficiency continues to improve, the use of motor fuel will decline year after year. If the EPA sticks to its reasoning, mandated biofuel volumes could decline in coming years.

This is bad news for renewable fuels. We already have more than 14 billion gallons of corn-based ethanol production capacity in the U.S. There are three domestic cellulosic-ethanol biorefineries that are expected to come online in the next 18 months, in addition to one operating in Florida. There also are dozens of projects planning to use feedstocks other than corn or cellulose, such as energy beets, to produce ethanol. These groups will all be in a fight to push their product in what could be a shrinking market.

So what’s the good news? The EPA did state that it will continue to support the RFS and that changes in the nation’s fueling infrastructure, fleet and ethanol use in future years are expected to impact its views of the blend wall and future mandated levels. Time will tell.

Editor’s note: Ripplinger is a bioproducts and bioenergy economist and assistant professor in the NDSU Department of Agribusiness and Applied Economics.